Really, how can Newsweek run a cover story titled "The Incredible Shrinking Dollar" without the entire investment world taking notice and commenting on it? I actually refrained from writing about this a week ago because I was convinced it would be such a widely-covered topic that making note of it would have become trite within hours.
The inimitable Richard Russell noticed it and has warned of the cover's potential significance, but amazingly almost no one else has made mention of it, at least not on the websites that focus most on issues relating to the U.S. Dollar.
Doesn't anyone remember "The Crash of '99?" It was early October of 1998 when Newsweek ran that particular beauty, which marked within 3 weeks the end of the stock market panic that surrounded another global currency scare and the Russian default. I guess everyone thinks it's different with currencies, but why?
To review, here's why such cover stories aren't just interesting, anecdotally, but are in fact noteworthy: Newsweek isn't stupid, it just happens that the well-known phenomenon of major news publications helping to mark the end of important market moves takes place simply because of their very nature - they publish stories about what has already occurred, and a story like the Dollar's fall only becomes news when it has happened in the extreme.
While news magazines print what has already taken place, the market, on the other hand, discounts future outcomes.
So, where does that leave us with regard to the Dollar? First, know that after having been a long-time Dollar bear, I am on the uncomfortable side of the argument that says the surprise of 2005 will be U.S. Dollar strength. Having looked pretty clever for first writing "Way Too Many Dollar Bears" on December 8th and not so clever when posting "Don't Confuse Brains with a Bull Market," as a follow-up on February 3rd (both pieces suggesting the greenback's fall is likely near its end, at least for an extended time), I'm now almost back to square one. A 6-month look at the U.S. Dollar index shows this:
Sure enough, a dollar rally followed that first article, a pullback the second. So, here I sit with little to brag about and a whole lot of what I'd call "reputational risk," if there is such a thing (not only is my view firmly contrary to popular wisdom, but the dollar perma-bear types are screamers - a guy like me, who for a time was a member of their "team," will get slaughtered mercilessly by these types if I'm wrong. That's fine, I'm a big boy, but everyone from African gurus to gold bugs to currency newsletter writers will revel in pointing out the inaccuracy, if wrong).
But look at the above chart a different way: China, Japan, South Korea and India have all stated in recent weeks that they may further diversify their foreign reserve holdings out of U.S. Dollars, following Russia, who said so in late November. What has happened as a result? So far, the Dollar index actually appears to be making a higher low, that's all. Shouldn't the Dollar have gotten killed on this "news" (I put the word news in parentheses because these announcements are anything but - statistics show that most of these entities have already been shrinking their U.S. Dollar holdings as a percentage of their portfolios for some time)?
What about the Canadian Dollar, on the other hand, which was directly mentioned by the Korean central bank as one of the currencies it would favor:
Shouldn't it be making new highs on this joyous "news?"
The Euro, the Pound and to some extent even gold all look like the Canadian Dollar - sort of tired. Really, if the announcements from these central banks were news, each of these items would be rocketing to new highs.
And that's the point - despite the fact that the decline in the greenback is only now hitting the cover of major news magazines doesn't mean it's news, at least not to the markets. I think this is the way things are supposed to feel - investment outcomes appear obvious at the end of important trends, not the beginning. Right near its peak, didn't many of us start to believe the idea that the NASDAQ would actually surpass the level of the Dow? Likewise, everyone's pretty darned sure which way the U.S. Dollar is headed... just ask your cab driver next time you get a chance.
It remains an unpopular call, but I still think the dollar is in the process of bottoming in here and will likely surprise the masses by posting a positive performance in 2005.
What Action to Take
So, regular readers will notice that I've never written a specific investment recommendation in these essays. As a practicing advisor, not only will I not give away for free the advice my clients pay me for, but my role is also different from that of, say, a newsletter writer; it simply wouldn't be appropriate for me to blindly recommend a stock or bond to the masses without possibly being able to know every reader's financial situation.
Speaking very broadly, however, to those who buy my argument about the U.S. Dollar and would like to know how to act on it, I'd say this: choosing assets classes isn't an all-or-nothing game; nothing says you have to be 100% "in" the U.S. Dollar or 100% out - in fact, it would be the height of arrogance/silliness to suggest either. Investing, then, is a matter of balancing your holdings.
For the last three years, it had been appropriate for investors to overweight their exposure to international stocks and bonds, foreign currencies and commodities. Now, however, I'd suggest it is time for many investors to consider bringing those weightings back to normal, perhaps even slightly below.
I know it feels like uncomfortable advice and goes against most of what you're hearing, but that's actually what continues to give me some measure of comfort in suggesting that investors consider this course of action. Keep in mind, part of what makes my firm unique is providing direct trading access to international markets, so the exact opposite advice would actually be better for my business in the short-run.
Follow-up on Brains/Bull Market
Because I couldn't reply to all the e-mails that came in from my last article, I wanted to follow up on two questions that seemed most prevalent from readers:
1) If the Dollar were to rally, would gold have to fall? Can't the U.S. Dollar and gold rally at the same time?
This question came in from a bunch of readers. First, the mere question worries me that perhaps there's just a little too much hope surrounding gold, as investors are looking for the reason the metal can rise in any environment. Speaking directly to the question, though, you're asking me to predict something that just hasn't shown itself to be the case in recent years... the relationship between the Dollar and gold has been quite clearly inverse for some time. While my current view on the dollar, then, may well have negative implications for the direction of gold in the intermediate-term, is my answer a case against owning any gold in your portfolio? Certainly not... I didn't suddenly forget about the challenges facing the U.S. Dollar/our national economic dilemma, I just happen to believe the unwinding of these imbalances could still take many years and that central banks will further extend that process through their actions, allowing for powerful counter-trend rallies that at times will be killers if you're on the wrong side of them. In fact, I'm of the opinion that every investor needs to seriously consider precious metals for his portfolio but again, it's a matter of striking the proper balance for your personal situation given market conditions.
2) How do I know if I'm reading a perma-bear?
First of all, my previous article was not a knock at someone like a David Tice, who clearly identifies himself as a bear and takes a stand on that side of the market. Nothing wrong with that. My concern is with those who have been the stopped clocks for years, haven't held themselves out as such and have gained notoriety as a result of a trend that finally turned in their favor. Think Henry Blodget when you think of these types/your financial health - watch out when that trend goes the other way!
If you haven't been reading a commentator long enough to know where he stood the last time the Dollar witnessed prolonged strength, perhaps you can look for clues. Some examples:
- Watch how economic reports are interpreted: even bears should sometimes admit that good news is good news. If they tell you a weak retail sales number is negative because it shows the U.S. consumer is "on his last legs" (which I've heard so many times before), then turn around the next month and say a strong showing from the same gauge is also negative because it's evidence that the "darn fool consumer continues so spend his head off," then be careful. I'm not making a case for this particular indicator, by the way, merely showing an example of what to watch out for.
- Pay attention to whom they quote: I haven't seen the name Marc Faber recently, for example. For a considerable period of time, this brilliant economist was the darling of the perma-bears because he shared their opinion. Since his recent comments suggesting that the dollar is likely nearing the end of its decline, he has become the missing man in such circles. Does the writer in question quote Warren Buffett (bearish on the Dollar), but ignore George Soros (who's not)?
- Use common sense: when you see an over-the-top pronouncement about how your assets should be aligned, file that writer away accordingly. I've seen some pretty wild assertions of how investors should position their portfolios, so think of things this way: would it ever be sound advice to move 100% of your money into tech stocks? Fine... then why would it be different with getting in or out of the Dollar?
Keep your head about you while balancing your assets classes, don't overload the boat on a particular side and act in opposition to the crowd - you'll usually be glad you did.
And by the way, Newsweek is probably the crowd.